New Zealand: New Government’s tax priorities

December 14 2017

New Zealand's new government was sworn in on October 26 2017. The new government is a coalition between the Labour Party and New Zealand First Party, with support by way of a confidence and supply agreement with the Green Party.

The arrangement is novel, in that this is the first time since the introduction of the proportional representation system more than 20 years ago that the party with the most seats in Parliament has not been part of the government. Labour, New Zealand First and the Greens hold 46, nine and eight seats, respectively (being 63 seats in total in the 120 seat House of Representatives), while the National Party, which had been in government since 2008, holds 56 seats. The remaining one seat is held by the Act Party, which has traditionally supported National.

The ministers of finance and revenue were appointed from the Labour Party. An associate finance minister has, however, been drawn from each of the New Zealand First and Green parties.

Government's tax policies

The new government has indicated that in its first 100 days it will:

Establish a tax working group to consider (among other things) whether there is a fair balance between the taxation of income and assets (this will likely include consideration of a comprehensive capital gains tax); and
Repeal the personal income tax cuts legislated under the previous government (which were due to take effect on April 1 2018) and instead implement a more targeted package of assistance.

The government has indicated that it will also:

Consider providing additional funding to Inland Revenue to "crack down on multinational tax avoidance";
If existing and currently proposed measures are considered insufficient, consider the introduction of a "diverted profits tax" as a further measure to address concerns about multinational tax avoidance;
"Crack down" on housing speculation by extending the bright line test (which deems gains on disposal of residential property bought and sold within a certain time period to be taxable, even if the gain would ordinarily be a capital gain) from two years to five years. A person's principal dwelling is excluded from this rule;
Introduce measures to prevent property "speculators" from engaging in negative gearing;
Abolish secondary tax (the higher rate of tax that is deducted from remuneration for secondary employment) and, as a transitional measure, make the refund process for secondary tax workers automatic;
Introduce tax incentives to encourage research and development;
Increase the penalties for tax evasion; and
Introduce a royalty on exports of bottled water.

The government has also confirmed that legislation will be introduced this year addressing BEPS to ensure multinationals pay their "fair share" of tax. These measures will likely reflect the former government's proposals in this respect.

Tax working group

The government announced the first details of its tax working group on November 23 2017. The tax working group will be chaired by former (Labour Party) Finance Minister Michael Cullen. It will have its first meeting no later than February 2018 and is due to issue its final report by February 2019.

Broadly, the tax working group will consider improvements to structure, fairness and balance in New Zealand's tax system, focusing on future challenges posed by the changing economic environment (accounting for, in particular, changes in technology and employment practices) over the next decade. The tax working group's terms of reference require it to report on:

Whether the tax system operates fairly in relation to taxpayers, income and assets, considering in particular:
the introduction of a comprehensive capital gains tax (excluding the family home); and
a progressive corporate tax (with a lower rate for smaller companies);
Whether the tax system appropriately balances the productive and speculative economies;
Changes to the tax system that would make it fairer and more balanced and efficient, considering matters such as what role the tax system can play in delivering positive environmental and ecological outcomes over the longer term; and
Other changes which, having regard to the interaction of the tax treatment of companies, trusts and individuals, would support the integrity of the tax system.

International tax reform to address BEPS is excluded from the tax working group's terms of reference, reflecting the work on BEPS-related measures that is already underway.